The Base Rate - Home Loan connect
Base rate offered by various banks serves as the reference for floating home loan rate. The floating interest rate should normally be equal to base rate plus the margin. Both the base rate and the margin differ from bank to bank. Base rate is also defined as a rate below which the bank will not lend to it customers (hence the word “Base”).
The earlier Bank Prime Lending Rate (BPLR) system was replaced by Base Rate (BR) System on July 1, 2010. Base rate system takes into consideration all aspects of the lending rates that are common as far as borrowers are considered. BR is a more objective reference number compared to BPLR.
Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice. The base rate offered by some Indian Banks during Oct 2011 is given below
The variation in BR of various banks can affect the floating home loan rates. Many homebuyers may not be able to relate the fluctuation in BR and its impact on Home loan rates. Here is a quick read about the connection.
With the implementation of BR, banks can choose any standard to arrive at a rate for a specific period that may be disclosed transparently. Banks are free to formulate the base rate, provided it is consistent and is made available for supervision and scrutiny, when required. Banks may determine their actual lending rates on loans and advances with reference to the BR and by including such other customer specific charges as considered appropriate.
Most banks arrive at a base rate depending on the following factors
- Cost of deposits
- Profit margin
- Working capital requirements
- Uncertain costs for banks for their functioning such as average employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses etc
- Adjustment for the negative carry (CRR and SLR)